Sometimes asking for a lower credit limit seems like a responsible thing to do. A high credit limit may feel like a temptation beckoning you to spend more than you can afford to pay.
If you’re considering asking for a lower credit limit, think again. It might feel like the responsible thing to do, but that higher limit could be helping your credit and could provide potentially important protection against a financial emergency.
What is Your Credit Limit?
Your credit limit is the highest amount that your credit card issuer will let you borrow on your card. It defines the limit to the available credit on the card. If your balance is zero your credit limit is your available credit on that account.
Your card issuer sets your credit card limit based on your income, your debt level at the time you apply for your card and your credit record. They use these factors to decide on an amount that they feel that they can safely lend to you. Borrowers perceived as having a higher risk of default will get lower limits than borrowers that are perceived as low risk.
Your credit card issuer may increase your limit if you request it and they are satisfied with your record. They may even increase it without you asking if you have established a reliable payment record.
How Does Your Credit Limit Affect Your Credit?
Your credit limit is an important factor in calculating your credit utilization ratio. Your credit utilization ratio is an important part of your credit score. In some scoring models credit utilization may represent up to 30% of your score.
Your credit utilization ratio is the ratio of your total credit and the amount you’ve actually used. For a credit card your utilization is calculated on the basis of your credit limit and the balance on your card at the time the credit card issuer reports to a credit reporting company.
If your credit limit is $10,000 and your balance at the time your issuer reports is $2000, your credit utilization ratio is 20%. Many experts recommend keeping your credit utilization ratio below 30%. A lower credit utilization ratio is better for your credit health.
If your balance stays the same, raising your credit limit will lower your credit utilization ratio and lowering your credit limit will raise your credit utilization ratio. For example, If your credit limit is $10,000 and your balance at the time your issuer reports is $2000, your credit utilization ratio is 20%, which is good. Cut your limit to $5000 and your utilization ratio goes to 40%, which is not so good.
Lowering your credit limit will increase your credit utilization ratio unless you also reduce your average balance proportionally. If your limit is cut in half you would have to cut your average balance on that card in half as well to keep the same credit utilization ratio.
If you have a short credit history or only one credit card the impact of lowering the balance on that card will be magnified. When there’s a small amount of information in your credit file the impact of any single change is always magnified.
A high credit limit will not have a negative impact on your credit unless you spend more than you can afford to pay.
Should You Ask for a Lower Credit Limit?
Before asking for a lower credit limit, consider the advantages of keeping the limit you have.
Assuming a consistent balance, a higher credit limit will give you a lower credit utilization ratio. That can help your credit. A higher credit limit also gives you a bit of reserve in case of an emergency. You may never use it and you should try not to use it, but it isn’t a bad thing to have.
The only time lowering your credit limit is a good idea is if you really don’t trust yourself to control your spending. If that’s the case, you can keep your credit utilization ratio low and protect your credit by lowering your use of that card. Consider using the card only for one or two small recurring expenses until you feel like you’re in better control of your finances.
Managing your existing credit carefully is generally a better decision than requesting a lower limit. The only exception would be a situation in which you absolutely cannot stop yourself from spending to the limit of your credit.
In Closing
Asking for a lower credit limit may feel like a prudent decision, but it can hurt your credit and deprive you of a potentially useful resource.
Only lower your limit if it’s necessary to control your spending. If you feel that you must reduce your credit limit to control your spending, consider reducing your card use to keep your credit utilization low even with a lower limit.
